Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Managers needed, private-equity experience preferred, must speak Mandarin and be willing to live in Beijing. The job ad isn't real, but Chinese banks should be hiring along those lines right now.

The lenders will be taking over troubled companies if a plan to convert 1 trillion yuan ($154.7 billion) of bad debts into equity is  implemented. That's happening as the world's four biggest banks by total assets, all based in Beijing, are caught between increased incentives to lend as a result of People's Bank of China stimulus, and a thinning buffer against bad loans at the highest level in a decade. Only managers with private-equity experience can help them get out of this bog. The alternative is hundreds of inefficient companies closing their doors.

Mountain of Trouble
Overdue loans at the world's four largest banks are at the highest in a decade
Source: Company filings
* Numbers include non-performing and special mention loans

The extent of the impact may become apparent from a monthly gauge of credit in China scheduled to be released this week. The median of 24 economists' forecasts in a Bloomberg survey is that aggregate financing increased to 1.4 trillion yuan in March, after slowing down to 780.2 billion yuan in February. Forecasters could be wrong again, because Chinese banks are having a hard time recovering bad loans. Allowing deeply indebted companies to convert debt into equity will make that process even more difficult, by forcing banks to manage them.

Up and Beyond
The average non-performing loan ratio of China's four biggest banks doubled in five years
Source: Company filings
* Average weighted by the assets of ICBC, Bank of China, CCB and ABC

The situation is comparable to that of U.S. mortgage lenders after the 2008 subprime crisis, when a slew of foreclosures saw Fannie Mae, Freddie Mac and the Federal Housing Administration turned into the biggest real-estate brokers in America, trying to sell 248,000 houses. Cashing in on that property wasn't easy.

Just as Fannie and Freddie officials weren't trained to sell houses, bankers in China aren't prepared to manage companies. The institutions also haven't shown signs of having the expertise to collect from delinquent borrowers. While Western banks tend to have collection task forces, in China most do not. Usually, the managers who extended the loans are the ones in charge of collecting them, increasing the incentives to keep lending to troubled companies instead of pulling the plug.

Imagine how this could be magnified when the troubled company is owned by the bank.

Giving banks control over the most indebted companies in China is unlikely to kill them and force a writedown of all their assets. That will slow down the adjustment that Beijing is trying to implement by phasing out inefficient industrial companies and moving the economy to depend more on services.

If the banks' focus shifts from lending to managing indebted companies and trying to keep them alive to avoid writeoffs, the world's second-largest economy will be cheated of momentum. They should start hiring talent now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net